Consumer is King: Banks can’t penalise for prepayment of loan

One of the biggest problems faced by banks and financial institutions is the failure of borrowers to repay loans. So, defaulters are offered incentives such as partial waiver of interest or a scheme for one-time settlement. Yet, surprisingly, banks often penalise a customer by levying charges for pre-payment of a loan account.

S Krupanidhi Educational Trust runs several educational institutions in Bangalore. It required finance to expand its activities. So, it applied to Union Bank of India, which sanctioned a loan of Rs 21.6 crore, to be repaid over seven years in monthly instalments of Rs 30,000. The interest was 11.25 per cent per annum.

As there was escalation in the cost of the project, the trust wanted a further loan. Union Bank agreed to consider the request, but later refused. The trust then approached Axis Bank, which agreed to cover the entire project. So, the trust decided on closing the loan account with Union Bank.

The latter demanded Rs 64.8 lakh as closure charges. The trust was compelled to pay this, under protest. More surprisingly, although the account was being closed via pre-payment, the bank charged Rs 169,299 as loan renewal charges.

The trust then filed a consumer complaint before the Karnataka State Commission. It said the loan sanction letter didn’t mention pre-payment charges. Even the loan agreement didn’t mention, but later a rubber stamp endorsement about charges was affixed on it . The trust contended these were never agreed to.

On the other hand, the bank argued the charges were payable according to the agreement. The bank pointed to the guidelines issued by the Reserve Bank of India (RBI) permitting pre-payment charges, as also its circulars.

The state commission observed the rubber stamp endorsement in respect of the charges looked like a subsequent insertion, but it would not be possible to decide this under the summary procedure followed by consumer fora. The endorsement stated that pre-closure would attract a pre-payment penalty. However, neither the RBI’s guidelines nor the bank’s circulars could be termed as rules. The agreement also provided that in case of a default, the bank would be entitled to recall the entire loan without payment of any pre-closure charges. When no charges are levied here, it wouldn’t be correct to levy these when the borrower voluntarily pre-pays. The commission held levying of the charges as not justified.

The commission also noted the observation of the Delhi State Commission in the case of State Bank of India v/s Dr Usha Vaid [ II (2008) CPJ 166 ], wherein it had been observed that no bank or finance company could be allowed the restrictive trade practice by binding the consumer to go on availing a loan even if the interest charged by the bank was higher, and any clause which operates adversely to the interest of the consumer would be void and unenforceable. A similar view had been taken by the Karnataka State Commission in the case of UR Rehman & Ors v/s Kashmir Bank Ltd & Ors.

Accordingly, it was held that it would be incorrect to levy pre-payment charges. Also, loan renewal charges could not have been levied when the loan was pre-paid. Hence, the commission ordered Union Bank of India to refund the pre-payment penalty and the loan renewal charges, aggregating to Rs 66,49,299, along with 12 per cent interest and costs of Rs 10,000.

Banks must learn to appreciate and give incentives to persons who make prompt or early repayment, rather than giving these to defaulters. This twisted logic must change.

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